Bill Gross: Is a Category Five Storm Brewing in Washington?



It’s day two of the partial government shutdown in the United States and the markets appear to be pricing in the pain. Equities, which advanced on Tuesday, sweat value on Wednesday as political trench warfare raged on in Washington.

Although the shutdown itself is embarrassing and costly — IHS estimates that it costs about $300 million per day to keep the lights off, shaving between 0.1 and 0.2 percentage points off GDP growth per week — it is really the threat of federal default that has turned the laughable incompetence of policymakers into a sobering threat to the U.S. economy.

Every day policymakers fail to act, what can politely be called the budget impasse comes closer to dovetailing with the expiration of the extraordinary funding measures that the U.S. Treasury is currently employing in order to satisfy the country’s financial obligations. These measures, enacted after the U.S. hit the debt ceiling in May, are expected to expire sometime in the next couple of weeks.

“The big date is October 17 on the debt ceiling,” PIMCO co-CIO Bill Gross told Bloomberg Television on Tuesday. “We will see if the dates can be merged together and show a category five storm instead of a category one.”

Speaking to the Economic Club of Washington, D.C., earlier in September, Treasury Secretary Jack Lew explained that, “If Congress fails to act and those measures are exhausted, we will have to use what cash balances we have on hand to fund the operations of a nearly $4 trillion government. At that point, meeting our nation’s financial obligations — including Social Security and Medicare benefits, payments to our military and veterans, and contracts with private suppliers — will be put at risk.”

Defaulting on these obligations will undermine the creditworthiness of the U.S., a prospect that should be so unimaginably horrible that policymakers scramble to avoid it, but has instead somehow turned into a piece of political leverage. Besides being unable to make payments to military personnel, veterans, and social security recipients, the Treasury market would be dealt a catastrophic blow.

“Markets are interrelated,” Gross told Bloomberg Television. “We have complex markets in terms of money market funds and repo and interconnected types of relationships that depends upon the solvency of the U.S. Treasury. The U.S. Treasury is basically the center of the global financial conflict. The default is unimaginable. If it happens, it will set into motion a complex series of events that affects not just bonds but credit transit transactions on a worldwide basis equity prices commodity prices.”

Executives from major financial institutions met with policymakers, including President Barack Obama, on Wednesday and offered their input on the issue. Here’s Goldman Sachs (NYSE:GS) CEO Lloyd Blankfein and Bank of America (NYSE:BAC) CEO Brian Moynihan commenting on the impasse.

Don’t Miss: Gallup: Federal Employment Increased on Eve of Shutdown.